Defensive stocks have come into focus again due to rising geopolitical tensions. We’ll discuss the two top dividend profiles among utilities—NextEra Energy (NEE) and Dominion Energy (D). The largest utility stock by market capitalization, NextEra Energy rose more than 35% last year. Dominion Energy, the third-largest utility stock, rose 12% last year.
Currently, utility stocks on average offer a yield of 3%. Dominion Energy offers a yield of 4.5%, while NextEra Energy offers a yield of 2.1%. Although NextEra Energy is the biggest in size, it offers one of the lowest yields among its peers.
Dominion Energy mainly operates in Virginia and South Carolina, while NextEra operates in Florida. These utilities generate a large portion of their revenues from regulated operations, which enables stable earnings and ultimately stable dividends.
Along with the yield, dividend growth plays a big role in driving shareholders’ long-term returns. NextEra Energy’s dividends have grown by 12% compounded annually, while Dominion’s dividends have grown by around 9%. Their above-average earnings growth has caused superior dividend growth. In comparison, broader utilities’ dividends have risen by nearly 4% during the same period.
NextEra Energy and Dominion’s dividend growth
NextEra Energy is one of the fastest-growing utilities in the US. The utility’s investments in solar and wind power have made it a pioneer in renewables among the top utilities. NextEra Energy’s large regulated operations in Florida facilitate stable earnings and predictable cash flows. The utility expects its premium earnings and dividend growth to continue for the next few years. Recently, Dominion Energy increased its 2020 dividends 2.5% YoY. Investors might not have liked the utility’s steep fall in dividend growth for this year.
NextEra Energy generally announces its annual dividend increase in February. Last year, the utility paid a dividend of $5.0 per share. Based on analysts’ estimates, NextEra Energy will likely pay a dividend of approximately $5.6 per share in 2020, which would be a 12% increase YoY.
Utilities (XLU) normally pay a big chunk of their earnings as dividends to shareholders. As a result, they have comparatively high payout ratios. NextEra Energy’s payout ratio has been lower than utilities’ average in the last few years. In 2019, the utility’s payout ratio is expected to be around 60% compared to its five-year average of 46%. Meanwhile, broader utilities have an average payout ratio of around 70%. Dominion Energy’s five-year average payout ratio was close to 87%.
NextEra Energy outperformed its peers
NextEra Energy has been consistently outperforming its peers for the last several years. In the last five years, the utility returned more than 160% (including dividends). Meanwhile, Dominion Energy returned 32%. Utilities at large underperformed broader markets during this period. The S&P 500 (SPY) returned 70%, while XLU returned 65%. NextEra Energy, the lowest-yielding utility, beat its peers in terms of returns in the last few years. The utility’s higher earnings influenced its stock movements, which largely contributed to its total returns.
Read Are Utility Stocks Losing Sheen after a Steep Run in 2019? to learn how utility stocks are placed in 2020.